What is a Property Appraisal? — The Deming Group

What is a Property Appraisal?

Whether you’re a buyer purchasing a home with a mortgage, an owner refinancing an existing mortgage, or selling your home to anyone aside from a cash-buyer a home appraisal will be an integral part of your real estate transaction. In this article we will explain what a home appraisal is, why you need one, & its role in the transaction process.

A home appraisal refers to an unbiased, professional evaluation to generate an opinion on the value of a home. In nearly every contract to-buy-and-sell (aka purchase contract) a home appraisal will be a necessary step before closing on a home. In the purchase contract the appraisal is used to determine whether the contract price (what you’ve offered to pay/accept) matches the opinion of the property’s value. Property appraisals are also commonly used in refinance transactions to ensure the lender isn’t giving the owner more money than the home is worth. The reason lenders typically make appraisals mandatory is they want to protect themselves in the event of default. When you buy a home with a mortgage it serves as the collateral for the loan. AKA if you stop making payments on your mortgage & go into foreclosure the bank will take your home & sell it to recoup their lent money. For this reason banks will nearly always require an appraisal (for purchase or refinance) to ensure they do not give you more money than they can recover in the event of the above worst-case scenario.

What is the Property Appraisal Process?

Property appraisals must be conducted by individuals who are licensed in the state where the home is located & must adhere to the Uniform Standards of Professional Appraisal Practice. Depending on the size of the property & other factors the appraisal process can be as short as 15 minutes or it can be a 2–3 hour thorough examination.

So what do property appraisals factor in? For starters, the report will include external facts about the property:

• Census tract
• Neighborhood boundaries
• Legal definitions
• Neighborhood characteristics (urban, suburban, etc.)
• Percentage of present land use (commercial, multifamily, etc.)
• Presence of public utilities
• Zoning classification
• Type of driveway or presence of a garage
• External condition of the home (are repairs needed?)
• Nearby comparable sales (comps)
• Exterior home sketch
• Photos of homes front, back, and surrounding area
• Front exterior photos of properties used in comps
• Tax information

As for internal factors a typical property appraisal will look at the condition, size, and structures present. They will also examine the following:

• Homes overall square footage & how it was calculated
• Number of bathrooms & bedrooms
• Remodeled elements vs. updated elements
• Foundation type & condition
• Type of basement (full finished, partial, crawl space, attic)
• Types of materials used in construction
• General condition of foundation, walls, roof, screens, gutters, downspouts, etc.
• General maintenance (leaky faucets, peeling paint, etc.)
• If using FHA or VA the appraisal will note safety features (# of smoke alarms or handrails on stairs)
• Presence & quality of heating and cooling systems (especially cooling)
• Any upgrades & amenities (energy efficient appliances, fireplaces, new patio, etc.)

This is not an exhaustive list, but gives a general idea of what property appraisals look at & factor into their determination of value. Because the bank is usually the one initiating the appraisal this cost typically falls to the borrower to cover. This fee on average falls between $300 — $600, but depending on certain factors it can exceed the $600 high-water mark.

What is an Appraisal Gap?

The property appraisal will be the first step in the closing process for buyers who are under contract on their home. If the appraisal comes in at or above the purchase price the transaction will proceed as scheduled. However, if the appraisal comes in below the contract price it can delay or derail the deal. An appraisal coming in below the contract price is known as an appraisal gap & will be covered down below in more detail!

In an ideal world every home will be priced fairly & at a value in conjunction with its appraised price. However, we don’t live in a perfect world & sometimes shit happens. Typically neither party on the deal wants the transaction to fall through due to appraisal gaps, so there are a few things to know.

What this Means for Buyers:

As a buyer you can be in an advantageous position, as the bank will NOT lend to you or any other buyer if the contract price is below the appraised value. This means you can re-open the negotiation process & request the seller come down in price to match the assessed value & allow the deal to remain on track. This does not mean every appraisal gap ends with the seller lowering their listing price. Sometimes people feel the appraisal is inaccurate & will refuse to budge on their contract price. In the event of this stalemate it’s good to strategize with your realtor on next steps. You can order another appraisal & request the seller cover expenses to generate a second opinion. Or you and your realtor can present a case to the appraiser to reexamine their valuation & see if they can raise their valuation to match the contract price.

What this Means for Sellers:

As a seller if you receive a low appraisal you may have no choice, but to lower your listing price to get it sold. This problem won’t go away if you just ignore it & move on to the next buyer. The new buyers bank will discover the same inaccuracies & you will be back at square one again. I also don’t think waiting for an all-cash buyer to come in with no appraisal request will result in a higher sales price. The reality is no buyer, cash or financed, wants to overpay for a home. The frustrating thing for sellers is your home value may be dragged down by what’s happening in your neighborhood & surrounding area. If there are a lot of recent distressed sales like foreclosures or short sales nearby, this can unfortunately drag your property appraisal down & impact your listing price. If you feel your property is in significantly better condition than the ones dragging it down, you & your realtor can present a case to the appraiser to change their valuation based on those factors.

The Bottom Line:

Although not the sexiest part of the home buying or selling process, the property appraisal is one of the most important pieces of the puzzle. When things go smoothly it is literally just a couple hundred bucks & a box checked. When there is an appraisal gap it can significantly delay or permanently derail the deal. Understanding the property appraisal process is a huge advantage regardless of if you’re buying, selling, or refinancing & particularly for first time home buyers! This is also another reason I would always recommend using a real estate agent on your transactions. The judgment, expertise, and confidence you gain from working with a professional always outweigh any perceived costs!

If you’re curious about the other steps involved in the home buying process, check out our first time home buyers guide!

Originally published at https://www.thedeminggroup.com on December 14, 2021.